Corporate Debt Restructuring in Azerbaijan
Worth to workout?
Azerbaijan insolvency legislation can hardly be named as the most updated. Current insolvency regulation is more “liquidation biased” rather than restructuring one. Thus, even in-court restructuring process falls into narrow approach and let the administrator deal with the business.
Azerbaijan has two different insolvency regulations: for banks and for non-bank companies and individual entrepreneurs. Reforms in banks’ related insolvency regulations allowed financial supervisory body to introduce resolution and restructuring arrangements. Meanwhile, insolvency regulation related to non-bank companies remains underdeveloped. Additional legal reforms needed in order to improve rules and procedures to reach international standards of best practice. Further, we will discuss the non-bank companies’ related issues.
Modernized insolvency system is an important part of sustainable economic development and “safety valve” for financial failures. Predictable insolvency regimes reassure creditors to work with debtors to avoid the shutdown of a business rather than withdrawing credit and seizing assets.
Creditors, in general, do not interested in total winding up of the debtor companies. Clearly, statutory priority order in Azerbaijan insolvency law significantly minimize probability of liquidation payments to creditors. Separately, having a prospective business activity, creditors reasonably more interested in saving that business and their payments, even in changed terms. Often its more reasonable participate in a debt restructuring process with debtors experiencing financial difficulties instead of pursuing enforcement proceedings.
Debt restructuring is a process whereby a legal entity facing financial troubles will agree with its creditors a new contractual framework for restructuring of the entity’s debt obligations.
An important feature of a contractual debt restructuring process is avoidance of the formal bankruptcy process and court involvement in relation to the debtor company. The company continues to trade often with a view to implementing a new business plan under which it will make fundamental changes to its cost base and business.
Adverse publicity associated with a bankruptcy, business disruption, time consuming and high costs associated with running a bankruptcy or court-driven rescue process can be detrimental factors to choose debt restructuring over other formal procedures.
While liquidation through insolvency has improved in Azerbaijan practice, reorganization in insolvency proceedings remains weak. Obviously, financial restructurings are complex process. For a successful result, companies should fix the challenges that caused the problems, and create revisions to the debt that accumulated from past transactions.
Special regulation of corporate debt restructuring as a mechanism outside the framework of existing insolvency law is essential. Although Azerbaijan insolvency law allows voluntary financial restructuring arrangements in general, additional modernization is required to implement detailed rules and guidelines into the legal framework to make contractual debt mechanisms more effective.
Generally, the contractual debt restructurings goes through the following steps:
- organization step
- signing confidentiality agreements and negotiating the standstill agreement
- agreeing the restructuring plan and negotiating the restructuring documents to effect the plan
- implementing the plan.
The debtor company will need to prepare itself to conduct the restructuring negotiations. In practice, the lead adviser will take on the coordination role and will be authorised to negotiate the standstill agreement and the restructuring documents and liaising with creditors.
In the beginning of the restructuring process, the debtor may need to agree confidentiality agreements with the creditors participating in the restructuring process. Further, the debtor can sharing information with the creditors about its business and about the other claims. Cash-flows, valuation and other financial data is vital information to enable creditors to determine if the company needs new money to survive. Creditors, generally want to know that the restructuring will leave them with a better outcome compared to alternatives.
The next important step is to agree moratorium terms which in practice realized by standstill agreement. The standstill agreement gives the parties an opportunity to agree a restructuring process, carry out due diligence without the risk of the process being undermined by some creditors exercising their remedies.
Standstill agreement usually covers the followings:
- defaults and payment obligations will be temporarily suspended
- creditors will not take enforcement action during the standstill
- debts will be transferred to third persons which are not already creditors
- an agreement that the creditors will not take any further security to improve their position;
Having signed the standstill agreement, parties will negotiate the final stage of restructuring deal. The final restructuring stage may proceed in the form of inter-creditors agreement. The deal will have to reconcile a number of factors. A restructuring plan may also involve new or restructured credit facilities, loss sharing arrangements among creditors, raising equity investment, asset sale, cost reduction and other financial instruments. Contractually any new debt finance will have to be given priority status over existing debt.
Azerbaijan companies, both on creditor and debtor side are interested in flexible arrangements, which supports their expectations in dealing with defaulting contractors. Available options under current insolvency law is inflexible and do not always provide the best solution. Contractual debt restructuring can be more responsive to the needs of the market players.
